Guidance Revision Leads To Drop In 3M’s Stock Price

3M (NYSE: MMM) reported its first quarter results on April 24, and while it was able to meet consensus expectations on revenue and narrowly missed on EPS, its stock price fell as the company reduced the high end of its guidance range. The organic sales growth is now expected to be between 3% and 4%, from 3% and 5% earlier, resulting in a change in the adjusted earnings guidance to $10.20 to $10.55 per share versus a prior expectation of $10.20 to $10.70 per share. Higher than expected costs and a soft automotive market are the main contributing factors to the weaker outlook. On the other hand, 3M is still reporting growth across all of its business segments, and a healthy 23% operating margin.

We have created an interactive dashboard based on our expectations for 3M’s performance in 2018, and have arrived at a price estimate of $267 for the company, which is higher than the current market price. Recent market volatility and a weaker outlook have been the main factors driving the stock down, as the core fundamentals remain strong. You can click here to modify the different assumptions, and arrive at your own price estimate for the company.

3M noted that selling prices were up 70 basis points in the quarter, and was positive for all the geographies, a good sign for the coming quarters. However, while pricing growth is expected to remain strong throughout the year, and should more than offset raw material inflation, the latter is coming in higher than expected. This is mainly a result of crude derivatives and increased transportation and logistics expenses. At the beginning of the year, 3M anticipated commodity prices to be between a $0.05 benefit to a $0.05 headwind. The expectation now is for it to be between a $0.05 to $0.10 headwind. This contributed to 3M reducing the upper end of its guidance.

Growth In China To Drive 3M In The Future

During the quarter, 3M posted 7% growth in developing markets, including 11% organic growth in China/Hong Kong. A number of trends in the region should ensure continued strong growth for the company in the years to come.

Safety and Security: 3M aims to provide safer work environments for Chinese workers, and in this regard, its portfolio of hearing protection, fall protection, and SCBA (Self-Contained Breathing Apparatus) through its new acquisition of Scott Safety, can be considered to be the next horizon of safety awareness for China. In 2014, China overtook the U.S. as the largest safety and security market in the world, and the growth has not slowed down yet. The demand for this segment is expected to improve with the growth of the infrastructure spending in the region. China alone is expected to need $28 trillion in infrastructure investment by 2040, which is more than half of Asia’s total needs, and 30% of global needs.

Automotive: The automotive industry has witnessed modest growth globally, with the growth in China production outpacing the overall growth, albeit at a lower rate than in prior years. According to the China Association of Automobile Manufacturers, in 2017, the production and sales of automobiles were 29,015,000 and 28,879,000 units respectively, up 3.2% and 3% year on year, respectively. In the future, a growing and richer middle class, and the potential of Tier 2 and Tier 3 cities, can be expected to drive growth. 3M manufactures over 400 products pertaining to this segment, such as auto body fillers, adhesives, cleaners, waxes, polishes, which can be expected to grow as the industry continues its strong march.

Healthcare: Developing countries bear the brunt of food-borne diseases, with high levels of hazards reported in the food available there. A number of studies have shown a higher prevalence of such diseases in developing economies, as compared to high-income countries. 3M is a leader in developing innovative solutions to help the food and beverage industry to optimize the quality of their products. The company manufactures food and beverage testing products to ensure the achievement of the highest food safety and quality standards. It also develops environmental monitoring programs to identify and eliminate sources of potential contamination.

Given the possibility of a trade war with China, one factor that may work in 3M’s favor is that the company has focused on local manufacturing, in the sense that it manufactures within China for its Chinese customers.

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